Let’s start with an analogy. Ideally, how much should you insure your house for? Enough to rebuild and replace, right?
Well, you can also look at the economic value of your life. If you die the income stops and if others depend on that income then that should be replaced. The amount of money needed to replace the income that wouldn’t be made if one dies, is called one’s human life value.
You can follow this link and learn more about that concept but here’s a summary: Take your income and use an interest rate that one could earn today.
Let’s use 5% for this example. Let’s say your income is $100,000 per year. To replace $100,000 per year at a 5% return, you take the income and divide it by the interest rate. ($100,000 divided by 5% or (.05). The answer is $2,000,000.
To prove that out, multiply 5% X $2,000,000 and you’ll see that you get the $100,000. So, in very rough terms that’s how you figure out your human life value and it’s a goal to shoot for in coming up with the answer to “How much life insurance?”
To review: Put your annual income in a calculator and then divide by .05 (or the interest rate of your choice) and there you go, one’s human life value.
